The latest data shows that non-performing loans (NPL) and special-mention loans have grown slightly in China's banking sector. In the first quarter of 2015, the balance of non-performing loans was 982.5 billion yuan in banking institutions, representing rates of 1.39 percent in non-performing loans, 212 percent in provision coverage, and 2.96 percent in loan loss provisions.

However, part of this was influenced by carry-over problems from the fourth quarter of 2014, reflected in the first quarter of 2015. In addition, the current provision of commercial banks remains relatively stable, which is sufficient to cover the potential losses of the loan portfolio. Real estate loans, local government platform loans, and the asset quality of personal loans in commercial banks are still expected to remain sound in the future.

Firstly, the business climate of manufacturing and commercial services are unlikely to improve in the short term under the impact of the economic slowdown. The overall NPL ratio of China's small and micro enterprises is relatively low - small and micro enterprises and the "two highs and one excess" (high-polluting industries, high energy consumption industries, excess production capacity industries) represent a relatively small proportion of loans. Even if they will have a negative impact on bank asset quality, the impact is relatively limited.

Secondly, the risk of large corporations may gradually appear. These enterprises have relatively strong anti-risk proofing, thus losses from non-performing assets are manageable. In addition, the main quality of commercial bank loans will remain stable.

Overall, despite continued downward pressure on the asset quality of commercial banks, the risk is still manageable. It is estimated that the rate of non-performing loans could rise 0.2 to 0.3 percentage points and reach 1.5 to 1.6 percent in 2015.

The author, Lian Ping, is chief economist with the Bank of Communications.

The article is edited and translated from《银行资产质量风险可控（观点）》, source: People's Daily, author: Lian Ping